Europe, Heal Thyself

BRUSSELS – European policymakers like to extol the strength of the eurozone: relative to the United States, it has a much lower fiscal deficit (4% of GDP, compared to almost 10% for the US). Moreover, unlike the US, the eurozone does not have an external deficit, which means that the monetary union holds enough savings to finance all of its members’ budget deficits and resolve their debt problems.

But, despite this relative strength, the European Union’s leaders seem incapable of resolving the eurozone’s sovereign-debt crisis. Despite meeting after meeting, heads of state and finance ministers have failed to reassure markets. Now, Europe’s policymakers are appealing for help from the International Monetary Fund and Asian investors.

This appeal for outside help is misguided, given the reasons why the euro crisis has gone from bad to worse, despite the EU’s abundant resources. The key problem is the distribution of savings within the eurozone. The countries north of the Alps have excess savings, but Northern European savers do not want to finance indebted Southern European countries like Italy, Spain, and Greece.

That is why the risk premium on Italian and other Southern European debt had risen at one time to 5%, and why, at the same time, the German government can issue short-term debt at negative real interest rates. Northern Europeans’ reluctance to invest in their southern neighbors is the problem behind the problem.